Alstom India Verdict: Navigating Shifting Sands Of Secondment Under GST Law

The taxability of employee secondment arrangements under the Goods and Services Tax (“GST”) regime has been a contentious issue, leading to significant litigation across India. Multi-national companies often second employees from overseas group entities to their Indian counterparts for a specified period as per business requirements. The salary payment to such seconded employees is made partly in India and partly by the overseas group entity. The payment made by the overseas group entity is reimbursed by the Indian companies. Whether such reimbursement constitutes 'consideration' for import of manpower supply service by the Indian companies has been a point of dispute in the GST regime.

Even in the erstwhile service tax regime, the issue of taxability of secondment arrangements was litigious. For instance, in Nissin Brake India (P.) Ltd. v. C.C.E.^[1], the CESTAT Delhi analysed the agreement between the Indian entity and foreign group entity and observed that seconded employees, for the duration of their assignment, were under the control and supervision of the Indian entity, with TDS being deducted from their payments. It was held that there is an employer-employee relationship between the appellant and the seconded employees and therefore, there is no supply of manpower service rendered by the foreign group entity. This decision was subsequently maintained in the Supreme Court^[2]. Similarly, in Volkswagen India (P.) Ltd. v. CCE^[3], the CESTAT held that such secondments were in the nature of internal group employment arrangements, and not a commercial supply of manpower, which was again maintained in the Supreme Court.^[4]

Thereafter, in 2022, the Supreme Court in the case of CCE & ST, Bangalore v. Northern Operating Systems Pvt. Ltd.^[5](hereinafter referred to as “NOS case”) took a divergent view from the previous judicial precedents and held that secondment of employees from overseas group company to Indian entity amounts to supply of manpower services and is liable to tax under Reverse Charge Mechanism (“RCM”). This decision was given in a specific factual scenario where the Indian entity provided general back-office and operational support services to its overseas group company under an agreement. The overseas group entity seconded its employees to the Indian company, who remained on the payroll of the overseas group entity, for the performance of the task outlined in the said agreement.

However, based on this Apex Court ruling, the GST department has initiated country-wide proceedings, mechanically demanding tax under RCM on the alleged import of manpower supply services.

Recognising the need to issue a clarification on the subject, the CBIC issued Instruction No.5/2023-GST dated 13.12.2023, wherein it clarified that the ratio of the NOS case should not be applied mechanically in all secondment arrangements since there may be multiple types of such arrangements, and the tax implications thereon may be different, depending on the specific nature of the contract and other terms and conditions attached thereto.

Recently, the Karnataka High Court in the case of Alstom Transport India Limited v. Commissioner of Commercial Taxes, Bangalore and Ors.^[6] has granted substantial relief on the issue of secondment of employees, holding that the seconded employees and the assessee company had a genuine employer-employee relationship, which is not taxable under GST.

A deeper dive into the Alstom Transport decision

Alstom Transport India Ltd. (“Alstom India / Petitioner”) had seconded employees from its overseas group entities to work in India for a fixed tenure and had entered into agreements with the seconded employees detailing their appointments, salaries and allowances. These expatriates were placed on the payroll of Alstom India, and their salaries were paid directly after deduction of TDS. However, the overseas group entity continued to provide social security benefits available to the expatriates in their home countries. The GST department demanded IGST under RCM on payments made by Alstom India to the overseas entities, contending that these payments were for the 'supply of manpower services' by the overseas entities. Alstom India filed a writ petition challenging the validity of the order confirming the demand of IGST under RCM on payments made to overseas entities for seconded employees.

The Karnataka High Court has quashed the demand against the Petitioner while observing that: (i) the seconded employees were seconded by the foreign parent solely to render services to the petitioner in India, (ii) the seconded employees were under the exclusive administrative and functional control of Alstom India, (iii) the salaries were paid directly by the Petitioner and subjected to Income Tax, including deduction of TDS and (iv) the expatriates were extended statutory employment benefits under the Indian labor laws. The Court held that the aforementioned facts collectively establish the existence of a genuine employer-employee relationship between Alstom India and the seconded employees, thereby falling squarely within the exclusion under Schedule III of the CGST Act.

This decision has implicitly distinguished the factual scenario in the NOS case (supra), wherein the seconded employees were on the payroll of the overseas entity; there was a master services agreement between the overseas entity and the Indian counterpart; and the administrative and functional control continued to remain with the overseas entity. Moreover, in the NOS case (supra), the overseas entity levied a mark-up on salary reimbursements to the Indian company for recovering its administrative costs.

The Alstom decision reiterates the legal principle of looking at 'substance over form' in taxation matters. It also highlights the importance of a fact-specific analysis in secondment cases, rather than a blanket application of the NOS judgment.

The Karnataka High Court has also held that, even if such secondment arrangements are assumed to be a supply of services, the deeming fiction provided in the second proviso to Rule 28(1) of the CGST Rules, 2017 neutralizes any scope for further tax liability, where full input tax credit is eligible to the recipient. The Court placed reliance in this regard on Para 3.7 of Circular No. 210/4/2024-GST dated 26.06.2024 wherein it has been clarified that if the invoice is not issued by the related domestic entity with respect to any service provided by the foreign affiliate to it, the value of such services would be “deemed” to be declared as “nil” and the said value would be treated as open market value for the purpose of determining the value in terms of second proviso to Rule 28 of the CGST Rules, 2017. The Karnataka High Court has also noted that the above view was endorsed by the Delhi High Court in the case of Metal One Corporation India Pvt. Ltd. v. Union of India & Ors.^[7]

Conclusion

The broader landscape surrounding the GST treatment of such arrangements remains dynamic, considering the pendency of similar matters before various other High Courts. This decision reinforces the applicability of a 'nil' value for supply of services between related persons, where the recipient is eligible for full ITC. By validating the “nil” valuation in revenue neutral situations, the judgement significantly reduces the compliance burden and potential for disputes that arise from the valuation demands in such intra-group transactions. This decision will have a major positive impact on various inter-company transactions, including corporate guarantees, the use of intellectual property or brand names, and the services provided by Indian support centres (like those offering IT, finance, or HR support to global operations). It is pertinent to note that each such transaction and facts must be examined separately to determine the applicability/ benefit of 'Nil' valuation.

Another question is whether the companies which are currently discharging tax under RCM on secondment arrangements, out of abundant caution can file for refund thereof on the basis of the ratio laid down in the Alstom case, by substantiating that their secondment arrangement is genuinely an employer-employee relationship in terms of Schedule III of the CGST Act, 2017.

Thus, it remains to be seen how this issue unfolds based on the judicial jurisprudence which will develop as and when the different high courts decide upon this issue on merits. Meanwhile, companies may review and potentially re-structure their secondment agreements to align with the principles laid down in this judgment.

Authors: Priyanka Kalwani (Associate Partner), Devanshi Sharma (Principal Associate) & Aanchal Trivedi (Principal Associate) At Lakshmikumaran & Sridharan Attorneys. Views are personal.

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